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Background
Under existing U.S. GAAP, many digital assets (for example, holdings of bitcoin and ether) are accounted for as indefinite-lived intangible assets under Topic 350, “Intangible Assets.” Both user and preparer stakeholders have expressed concern to the FASB that an intangible asset accounting model in which digital assets are measured at historical cost less impairment does not faithfully represent the economics of such holdings. Many of these same stakeholders asked the FASB to consider whether all or some subset of digital assets should be accounted for at fair value.
In response to stakeholder feedback, in May 2022, the FASB added a project to its agenda to consider whether a certain subset of digital assets should be measured at fair value.
Scope of the FASB’s proposal
The scope of the FASB’s proposal includes crypto assets held by an entity that possess all the following characteristics:
- The assets meet the definition of “intangible asset” as defined in the Codification Master Glossary.
- They do not provide the asset holder with enforceable rights to, or claims on, underlying goods, services, or other assets.
- They are created or reside on a distributed ledger based on blockchain technology.
- They are secured through cryptography.
- They are fungible.
- They are not created or issued by the reporting entity or its related parties.
Crowe observation: The project’s scope includes holdings of some of the most actively traded crypto assets, such as bitcoin and ether. On the other hand, it does not include other crypto assets such as non-fungible tokens (NFTs), utility tokens that provide the holder thereof with rights to goods or services, and stablecoins that meet the definition of a financial instrument. The proposal also would exclude crypto assets commonly referred to as “wrapped tokens”1; the FASB concluded that wrapped tokens likely give the holder of the token a right to another asset (the underlying crypto asset) and, therefore, would fail one of the scoping criteria previously noted. Entities with crypto assets outside the scope of the FASB’s project will continue to need to apply judgment to determine the proper accounting treatment for such assets.
Fair value measurement
Crypto assets in the scope of the proposal would be measured at fair value at each reporting period, with changes in fair value recorded through net income.
The board considered whether it should provide application guidance for determining the fair value measurement of crypto assets (for example, how to determine the principal market, how to determine leveling within the fair value hierarchy, and what to do if markets are inactive) but ultimately decided not to.
Crowe observation: While it considered making the fair value measurement of in-scope crypto assets optional, the FASB ultimately concluded crypto assets within the scope of the project should be required to be measured at fair value. Board members decided fair value measurement better reflects the economics of crypto asset holdings within the scope of the project. Additionally, a fair value option could potentially result in a lack of comparability.
Presentation and disclosure
Presentation
Under the FASB’s proposal, in-scope crypto assets would be presented separately from other intangible assets on the balance sheet. The primary rationale for separate presentation is the difference in measurement bases between crypto assets within the scope of the project (fair value) and other intangible assets (cost less impairment). The FASB also concluded changes in the fair value of crypto assets should be presented separately in the income statement from changes in value (for example, impairment and amortization) of other intangible assets.
With respect to the statement of cash flows, the FASB decided to include application guidance in its forthcoming proposal to help entities determine cash flow classification. Specifically, the proposal would require entities to classify as an operating cash flow crypto assets received as noncash consideration during the ordinary course of business that are converted nearly immediately into cash.
Crowe observation: Consider an entity that accepts crypto assets as a form of payment in a revenue transaction and has a policy of immediately converting the crypto assets into cash. In this example, the proposal would require the entity to classify the cash flows received from the sale of those crypto assets as operating. On the other hand, many companies hold crypto assets for the purposes of price appreciation; in such circumstances, an investing cash flow classification would be more appropriate.
The proposed presentation requirements would apply to both public and private companies.
Disclosure
With respect to disclosure, the proposal would require reporting entities to disclose:
- At each reporting period, the name, cost basis, fair value, and number of units of each significant crypto asset held and the aggregate fair values and cost bases of crypto assets held that are not individually significant
- On an annual basis, how the cost basis of crypto asset holdings is determined (for example, specific identification)
- At each reporting period, the nature and remaining duration of any restrictions that apply to crypto asset holdings, such as a contractual sale restriction (for example, a lockup period), and the circumstances that would lift the restrictions
- On an annual basis, a reconciliation, in the aggregate, of activity between the beginning and end of the period for total crypto asset holdings, including the amount of additions, dispositions, and gains and losses
In connection with the reconciliation disclosure, a reporting entity would disclose information about the following:
- The nature of activities that result in additions (for example, purchases, receipts from customers, or mining activities) and dispositions (for example, sales or use as payment for services)
- The total amount of realized gains and losses from dispositions
- If not presented separately, the line item in which gains and losses are reported in the income statement
Crowe observation: The board debated the utility of the reconciliation of crypto asset activity disclosure. Several board members questioned the incremental benefit of the rollforward but ultimately decided to include the requirement in the proposal to seek feedback from stakeholders. The FASB decided not to require several other disclosures, including an entity’s purpose for holding crypto assets, information about who holds the related private key, and the timing of pricing information used to measure fair value (for example, time zone information).
Costs to acquire crypto assets
The proposal would require costs incurred to acquire an in-scope crypto asset – for example, commissions – to be expensed as incurred, unless an entity is subject to specialized industry guidance (for example, an investment company) that would require or permit such costs to be capitalized.
Crowe observation: The board believes expensing costs incurred to acquire crypto assets would give investors better information about the changes in the value of crypto assets caused by price changes.
Transition and effective date
Entities would adopt the proposal using a modified retrospective approach, recording a cumulative effect adjustment to equity (or net assets) at the date of adoption. While an effective date has not yet been set, the proposal would allow for early adoption. If it early adopts in an interim period, an entity would be required to apply the proposal as of the beginning of the year in which the interim period is included.
Next steps
The FASB will seek comments from stakeholders, which will be open for input on the proposal until June 6, 2023.
